Snakes and Property Ladders

How is one of the most exciting moments in someone’s life also the most stressful? 

Passports. Bank statements. Proof of employment. Payslips. So many different documents provided to so many different people.

For most people buying a house, whether for the first time or finally finding your “forever home”, is meant to be one of the best moments in their lives. But this is often soured by several journeys to the estate agents/solicitors to prove you are who you say you are or by needing to send numerous personal documents by post. 

This blog looks at the documentation and due diligence behind house buying - and how it can be simplified whilst still mitigating the risks. At FINTRAIL, some of the team have been lucky enough to have bought a place within the last 12 months. We have all experienced the good, the bad and the ugly during the process but surprisingly not all in the same area. We are going to discuss the risks associated with property purchases, compare and contrast our journeys, look at how this market differs from FinTechs and gain insight from Thirdfort, a firm which specialises in providing identity verification and source of funds checks for lawyers in the property market. 

What are the risks?

Before we dive into the FINTRAIL team’s experience of property purchases, we should look into the risks associated with the property market. Laundering money through the purchase of property is often described as one of the oldest known ways to legitimise ill-gotten gains. As property purchases naturally involve high prices, it is an easy way to move large sums of criminal proceeds. Properties can also be used operationally in a criminal’s organisation - potentially as a way to generate legitimate income via rent or as a location for other illicit activity. Another risk to be aware of, which is highlighted in HMRC’s risk assessment for estate agency businesses, is the risk of overseas buyers, especially from higher-risk jurisdictions. Property purchases may be made with the proceeds of crimes committed in other jurisdictions, including but not limited to bribery and corruption and even sanctions evasion. Transparency International published a paper in 2015 which showed the extent of this risk: 40,725 London property titles were held by foreign companies of which 4.89% were held by companies incorporated in secrecy jurisdictions. 

As the risks faced by the parties in the property sector are being increasingly highlighted by numerous governmental and non-governmental organisations, it is not surprising that the property sector in the UK has come under scrutiny by both law enforcement and the supervisor under the Money Laundering Regulations, HMRC. Unexplained wealth orders (UWOs) are a type of court order used in the UK to compel the target to reveal the sources of their unexplained wealth. It uses the reverse onus principle, where the burden of proof shifts to the target. We have seen the majority of UWOs being issued to find out how multiple high-value properties had been financed, and in the most recent case saw nearly £10m of assets handed to the National Crime Agency. This shines a light on the need to understand the source of funds used to purchase a property and if this is in line with the individual’s profile. In 2019, HMRC fined Purplebricks for breaches concerning failures in having the correct policies, controls and procedures, conducting due diligence and timing of verification. This highlights the need for the sector to have the correct level of customer due diligence in place, which involves understanding and verifying who your customer is. 

Our Journeys 

Where is the technology? 

The first interesting observation is the lack of technology in most of our journeys. Lauren was lucky as her solicitors used an app for verification and a portal to update on progress. Being able to take a picture of your ID and upload a selfie is something we now come to expect in the FinTech space, which was replicated here. However, for Rachel and JP, the methods used to verify their identity, including certifying copies of documents or having to see someone face-to-face, were time consuming, costly and quite surprising given the online methods we know work very well in identifying and verifying individuals today.  At the time of JP’s purchase, the national lockdown was underway and COVID restrictions were in place for all businesses. To require face-to-face contact when businesses should have been operating as “COVID secure” does not seem logical, especially with the numerous contactless options that are available.  

Thirdfort have noted that the legal sector is embracing technology at an increasing rate, and certain developments mean that this trend is likely to continue apace. The HM Land Registry recently announced that they are now accepting digital signatures, and the Ministry of Justice temporarily accepted video witnessing of wills during this year’s lockdown. At the same time, law firms have had to digitalise their approach to client due diligence due to social distancing and lockdown restrictions, so it seems that the process of buying or selling a property is set to become more tech-focused. 

So what if the industry took more of a risk-based approach?

Using a risk-based approach is an expected element in a risk management framework. Within the conveyancing process, a risk-based approach could include collecting different levels of information and documentation for identity verification, varying the beneficial ownership threshold for verification, and collecting different levels of evidence for source of funds/wealth all in line with the risk of the customer. To help define that risk-based approach, a risk assessment should be conducted to identify the areas with the biggest risk exposure and tailor the procedures to mitigate those risks. HMRC recently published guidance to help estate and letting agents identify and understand where those risks could lie. 

In our cases, there appeared to be a lack of a risk-based approach for Lauren with her source of deposit checks from the solicitors.  A small percentage was kindly gifted by her mum, who was then asked to prove her source of funds with numerous bank statement requests. Given Lauren’s mum has been a working professional for a number of years and has accumulated savings over those years, the level of detail required for her to prove this seems excessive. This point is emphasised more when you look at JP’s source of funds check.  His proceeds came from the sale of another house, but this was not investigated in detail to ensure the funds did not come from another source. At FINTRAIL we encourage all our clients to treat their anti-financial crime checks as something more than a “tick box exercise”, which does not seem to be the case in relation to JPs SoF checks.

What next? 

Here are some key takeaways for the property market to consider:

• Conduct a risk assessment to ensure you identify and better understand the key financial crime risks you are facing. 

• Look out for red flags of suspicious activity, which may include:

  • Anonymous or difficult to identity owner 

  • Unusual or inconsistent income 

  • Over or under estimated property prices

• Take advantage of the technology out there to create a smoother customer journey while still mitigating risks.

• Apply a risk-based approach to your financial crime framework to ensure you are focussing your attention on the highest risk areas, especially when it comes to verifying source of funds.

• Apply more targeted client due diligence and enhanced due diligence to specific areas of risks identified, rather than applying the same standard measures across the board. This allows firms to mitigate the actual risk posed by the customer rather than just conducting a tick box exercise.

• Look out for HM Land Registries guidance on digital identity checking in conveyancing.

• In light of the Covid-19 pandemic, companies such as Thirdfort have shown the importance of individuals being able to complete their due diligence checks in the comfort of their own home. It is important to hit a comfortable ground between ensuring firms can verify clients and manage risk compliantly and taking some of the pain-points out of property transactions for the client.

If you’d like to learn more, please contact Lauren Vincent, Team Coordinator, or email us directly at: contact@fintrail.com.

ON DEMAND: ComplyAdvantage Webinar - The Rise of Money Muling

*** Now available on demand ***

Due to rapidly changing global circumstances, high unemployment and uncertainty surrounded the future, money muling is tragically on the rise.

It is a crime that often disproportionately affects the most vulnerable and financially illiterate. Criminals involved in money muling often survive by tricking ‘clean’ individuals with no criminal history but who is ultimately responsible for educating and helping to prevent this insidious form of money laundering: individuals, banks, governments, regulators, social media platforms?

Join our expert panel including:

• Charles Delingpole, Founder & CEO, ComplyAdvantage

• Gemma Rogers, Co-Founder, FINTRAIL

• Tom Keatinge, Director, Centre for Financial Crime & Security Studies, RUSI

• Adam Hadley, Director, Tech Against Terrorism

In this thought-provoking webinar, the panel will be exploring:

• The role that social media platforms play in recruitment, advertisement, and propagation

• Why this issue deserves urgent and serious attention now

• What the financial services sector and the regulator is and should be doing to stop money muling

Partners Against Crime: Building Strong Partnerships on the AML Frontlines

It is safe to say that the US FinTech market has hit its stride. Global FinTech funding soared past $34 billion last year, and the US makes up around half of the global FinTech market. More and more consumers are turning to FinTech products to transform the way they manage their finances, paychecks, loans and insurance. With COVID-19 keeping us all socially distanced for the time being, the move toward digital finance is only going to pick up more steam. 

But the FinTech sector isn’t built on standalone infrastructure. As Banks attempt to stay on the forefront of innovation and as FinTechs seek the regulatory and compliance infrastructure they require, FinTech/Bank partnerships have become the new normal. This has been particularly important for the growing internationalization of FinTechs - as successful European FinTechs seek to cross the pond, having a legacy partner helps them gain a foothold.

These partnerships can take a variety of different forms - though for the sake of this piece, we’re going to focus on community banks that handle the banking back end of FinTech products, such as holding FinTech customer deposits and ensuring they are FDIC-insured or offering for benefit of (FBO) accounts to FinTech MSBs. As part of these relationships, FinTechs end up not directly regulated, and it’s up to the partner to ensure the FinTech remains compliant with BSA regulations. This means that banks have to be careful to select the right possible FinTech partners, and the same goes for FinTechs! Wirecard’s recent collapse, which has sent FinTechs all over the world scrambling for new partners, particularly highlights the level of overall due diligence and care that is needed when forming and sustaining a banking partner relationship.

What Happens When It Doesn’t Work Out?

We’ve seen first hand how FinTechs and their partners are pushing forward to innovate not just on customer-driven financial services, but also on financial crime prevention. However, the risks of getting partnerships wrong still need to be taken seriously and inform a firm’s approach to stakeholder management. 

So what does it look like when things go wrong? 

For some FinTechs, it means not getting very far. US partner banks tend to have steep compliance requirements and expectations - that means being able to demonstrate your BSA/AML compliance capability up front through risk assessments, policies and procedures, training, and effective control integration. Partner banks like Cross River weed out the majority of prospective FinTech partners due to the amount of compliance required. For FinTechs, failing to get a partner bank relationship set up can mean the difference between a successful funding round and going back to the drawing board. For European FinTechs and other international players with their eyes set on the US market, failing to obtain a banking partner due to compliance reasons could potentially shut off millions of new customers and dramatically set back scaling plans. 

A few bad actors could also risk the current environment of strong partnerships. Across-the-board de-risking of correspondent banking illustrates what can happen when the difficulties managing AML/CTF controls within a partner relationship cannot be prudently resolved.

The picture isn’t great for partner institutions either. Building out relationships with the FinTech sector is becoming a profitable lifeline for institutions looking for ways to innovate and reach new client segments outside of their traditional stomping grounds; turning off the taps can obviously have an impact. And on the compliance side, as FinCEN expects financial institutions to ensure the compliance of their FinTech partners, failure to do so could risk steep fines and penalties. 

In fact, one of the most frustrating obstacles to successful partner bank/FinTech relationships can be the current regulatory landscape, according to Robin Garrison, VP of Compliance at MainStreet Bank, who presented on making the most of partner bank relationships at the FinTech FinCrime Exchange (FFE). Certain regulators can hold traditional and sometimes out-of-date perspectives on risk and financial crime - and the absence of a unified approach between different US regulators (the Office of the Comptroller of Currency (OCC), for instance, has been much more proactive in supporting FinTech innovation than some of their counterparts), can only add complication. To really get the regulator onboard, Robin added, it’s important for FinTechs and their partner banks to work together to ensure appropriate testing has been done to evidence to the regulator that any financial crime risks are being appropriately mitigated.

Even if a FinTech and partnering bank do succeed in getting a relationship off the ground, poor relationship management can hinder positive efforts to prevent financial crime. High volumes of manual work, a lack of knowledge on how the other party is operating, and long delays in communication can mean that even if a partnership looks successful on the outside, it may still be struggling with balancing financial crime compliance and customer experience. 

How Do You Make It Work?

Looking at the risks involved with setting up a successful partnership, it’s no wonder that it can be difficult for a startup to break into the FinTech space or for a legacy institution to take the leap into a new relationship in a digital world. But there are plenty of examples of where partnerships have taken off. What are they getting right? 

1. They set a strong foundation. 

This is something that features in all of the industry reading on how to make the most of a partner bank relationship. And that really is relevant here too! If you don’t have a strong, open, and transparent partnership in other parts of the business - such as making sure your financials are sorted and growth strategies are aligned - then it’s going to be difficult to build a relationship that allows you to successfully fight financial crime. In fact the best approach to building a positive relationship is to ensure that BSA/AML compliance isn’t segregated. From day one, compliance should be considered as an integral building block in wider relationship management efforts. This will ensure it doesn’t come back to bite once the relationship progresses on the commercial side.

Strong, positive foundations also go beyond shared values. Robin left FFE members with an important message about selecting the best banking partner. “Don’t go with the first partner bank willing to accept you. It can be very difficult to ensure that your data can be fed into and processed by your partner bank, so think about how well your technical systems will integrate when picking your banking partner.” Without aligned systems, anti-financial crime processes become a greater operational burden, and it becomes far more difficult for the partner bank to have the information they need in order to conduct robust assurance on the activity of their FinTech partners.

2. They establish clear roles and responsibilities.

Establishing clear roles and responsibilities is important for any business relationship, but it’s especially important from a financial crime perspective. When laying out the contractual arrangement, FinTechs and partner banks should try to agree up front and in writing who will be responsible for which part of the BSA/AML control framework and who the key points of contact are. 

For example, does the partner bank need to review all KYC files on a FinTech’s new customers before they onboard, or will the partner bank perform assurance on the KYC process through periodic (e.g. quarterly) spot checks? If the FinTech is managing KYC, who should they talk to about trialling a new ID verification provider? Who will be responsible for OFAC screening at onboarding, throughout the business relationship, and for customer screening? To what extent should the FinTech establish their own transaction monitoring tool? Or will they be able to rely on the TM system offered by the partner bank?

There may be circumstances where the partner bank and FinTech relationship is so intertwined that setting rigidly defined roles and responsibilities just isn’t feasible. Anthony Jerkovic, Head of Data & Risk at Bank Novo, explained that, in Bank Novo’s partner banking relationship, roles and responsibilities often require a certain level of flexibility in order to effectively address the dynamic problems faced day-to-day. “If everyone touches a case, it is hard to precisely draw the lines of responsibility. Instead, we focus on close communication and working together and try to see them as an extension of our own team.”

If partnering firms aren’t able to develop a close working relationship or meaningfully outline roles and responsibilities, problems will inevitably arise. At best, it may take longer for both parties to process financial crime-related tasks, such as the investigation of unusual or suspicious activity, but at worst, serious financial crime cases could go undetected, as no one was formally designated as being responsible for identifying red flags.

3. They have a clear escalation process.

As part of laying out a clear delineation of roles and responsibilities, partner banks and FinTechs should also work together to establish clear escalation paths. The goal is to determine when the hand off happens and how. A lot of this will come down to the partner bank’s risk appetite, as they are the ones ultimately liable for any financial crime activity that occurs. But depending on the relationship, there may be certain activities that the FinTech can respond to without immediately escalating to their partner bank.

For example, one partner bank may be comfortable with a FinTech making a decision on whether to accept a customer with an adverse media finding against them, while another partner bank may require all adverse media hits to be escalated to their compliance team for review. 

Let’s look at another example, which illustrates how escalation and communication paths work both ways. For instance, if a FinTech is doing their own customer screening, they may be expected to escalate all confirmed PEPs to the partner bank for approval prior to the start of any business relationship but only do so after clearing the alert and requesting necessary due diligence documents on source of wealth and source of funds. By contrast, if the partner bank does the customer screening, they may have to reach out to the FinTech to communicate with the customer to obtain EDD documentation.

Without getting the escalation process right, FinTechs and partner banks will run into the same problems as with roles and responsibilities - difficulty maintaining BSA/AML compliance and operating effectively. 

4. They regularly communicate on all things fincrime. 

The whole goal of outlining roles and responsibilities as well as escalation paths is to ensure that communication on financial crime issues remains robust throughout the partnership. This is especially important when both parties are closely involved in day to day financial crime operations. Without close communication, unusual customer activity can’t be investigated quickly, leaving funds suspended in a way that can damage a customer’s experience if they’re innocent. Given how quickly funds can move in and out of a FinTech account, without close cooperation, a partnership may fail to stop significant volumes being laundered through an account. 

Samuel Peters, BSA Manager at Middlesex Federal, Bank Novo’s partner bank, highlighted that “especially when dealing with those in traditional banking, communication is key.” Depending on the nature of the relationship, frequent and regular touchpoints may be needed, even multiple times per week. Though, Samuel also flagged that it was important to ensure that both FinTechs and their partner banks understood that there would always be some level of risk involved in the arrangement. “Traditional banks and FinTechs are going to have different risk appetites; regular and open communication is the best way to help close the gap.”

Of course, there are also regulatory expectations with regards to reporting. Partner banks are currently expected to file a suspicious activity report (“SAR”) within 30 days of the initial detection of the suspicious activity, provided there’s a suspect. This means that the FinTech has to move quickly to escalate any unusual activity and work closely to support any investigation from the partner bank in order to meet the deadline. 

Even in cases where FinTechs are given a good degree of autonomy, they should still work closely with their partner bank to ensure that both remain on the same page in terms of risk appetite. This means keeping the partner bank up to date on any new product developments, target customer segments, and geographic expansion plans, as all of these would impact the FinTech’s financial crime risk profile. 

What Next?

FinTech relationships with partner banks aren’t going away and do come with their share of risks. But through successful stakeholder management efforts taken with a fincrime focus, both parties can work together to stop criminals exploiting the US financial ecosystem.

We have experience working on both sides of the table to help FinTechs and their partner banks manage financial crime risks. If you’d like to discuss this more, please contact our US team or email us at: contact@fintrail.co.uk

The Payment Services Act - A unique risk based approach to regulation or an overly complicated set of standards?

In January 2020 the anticipated Payments Services Act (‘PSA’) came into force in Singapore. According to the Monetary Authority of Singapore (‘MAS’) the act is:

“A forward looking and flexible framework for the regulation of payment systems and payment service providers in Singapore. It provides for regulatory certainty and consumer safeguards, while encouraging innovation and growth of payment services and FinTech.”

In this paper we look to understand:

• the genesis of the PSA

• what approach has been taken to licensing new payment methods

• what are the differences to the approach taken in Europe, and

• whether the implementation of the PSA in Singapore will succeed in promoting innovation

Remote Delivery: NuBank Financial Crime Compliance Project

In the current climate the notion of ‘working from home’ has become the new norm. This means that some businesses have had to rapidly adapt how they work, how they deliver their products and services to their clients, and how they remain top of their game. Whilst FINTRAIL do have physical offices in London, Singapore, the US, we operate flexible working for our employees, and have also conducted fully remote projects in the past. We feel that these projects and our working set up has allowed us to quickly adapt to this new normal and we thought we would share some of our insights with the wider community. 

One of our most recent fully remote projects involved working with NuBank on a Financial Crime Compliance project. NuBank is a Latin American neobank and they have one of the largest customer bases in the region and sector, and in January 2020 confirmed they hit the 20 million customer target. NuBank was a completely new client for FINTRAIL, and also one of our largest projects where there would be no face-to-face, or in person element at all.

The project spanned three jurisdictions; Brazil, Mexico, and the UK. This involved assessing, and analysing regulation from Brazil and Mexico, as well as scheduling calls to accommodate for two quite different time zones! After the project had been completed, we had a feedback session with NuBank to discuss what worked, and maybe what didn’t, when conducting a remote project. NuBank was very pleased with our work. They commented that we were aligned with them as a business, and the project results were above and beyond what was expected. We are confident that our work can be delivered in a fully remote nature, and this project only helped to solidify that confidence.

Key learnings:

• Get the basics right. This may sound simple, but the client should be clear on the project timelines and deliverables. Having this understanding at the start and throughout helps to ease both sides of any unnecessary stress, and improves time management and control of the project. When a project involves no face-to-face aspect, all communication becomes much more scheduled, and therefore understanding the scope and nature of the project is key. This extends to us as FINTRAIL too, we always ensure that we understand a company and its products to the best of our ability when conducting a project.
  

• Communicate, communicate, communicate (with the relevant people). Ensuring that the correct people are involved in the conversation is very important, especially during a remote project. With often already packed diaries, no one wants to sit on a video call that they cannot contribute to, or that they are not needed for.  By inviting the correct and relevant stakeholders only to meetings where they are needed prevents video call fatigue within the project, helping for each conversation to be meaningful and for people to remain engaged. 
  

• Leverage technology.  Tools such as Slack can really help with interim communication between larger video meetings. Slack allowed for timely access to key pieces of information, and to lay the groundwork for more in depth meetings. It was also crucial to have this kind of communication due to multiple time zones. Emails felt a bit stiff and formal, and could get lost in a pile, whereas the Slack messages could be picked up whenever suited, and answered quickly and easily.

Get in Touch

If you are interested in speaking to the FINTRAIL team about the topics discussed here or how we are working remotely with clients globally today on all aspects of their financial crime programme, please feel free to get in touch with one of our team or at contact@fintrail.co.uk.

FINTRAIL’s Digital Anti-Financial Crime (AFC) Support

As a tech first company we have always used technology to serve our clients in the best possible way. As the global financial service industry embraces new digital and virtual working practices, FINTRAIL is uniquely positioned to support global customers. We want to ensure that we continue to enable organisations to thrive while managing their financial crime risk and meeting their regulatory requirements. 

As such we have taken three of our offerings and fully digitised them to ensure that we are still delivering the same tailored approach and bespoke output without compromising on quality. Our products are designed to be outcomes-focused and immediately impactful. 

On any audit or health check booked between now and the end of July 2020, that is completed by the end of the year, we are offering a 5% discount. Additionally to play our part in the fight against Covid-19, we will donate a further 5% to the World Health Organisation (WHO) Covid-19 Response Fund.

Get in touch today to discuss this and how we are working remotely with clients globally today on all aspects of their financial crime programme, or find out more here:

Digital AFC Support

FINTRAIL on the Sibylline Podcast: No Lockdown Here – Covid & Financial Crime

FINTRAIL’s APAC MD, Payal Patel, joins Sibylline COO Tamara Makarenko and Samantha Sheen for a conversation about the impact COVID is having on financial crime.

Their discussion covers why financial crime is ‘surviving’ lockdown, new financial crime trends, the regulatory response, and how companies can safeguard themselves. The podcast ultimately outlines a few ‘Golden Rules’ of how we can build our resilience to this unfolding financial crime environment.